You may already be a sole trader and are considering whether to become a limited company or you may not have started trading yet and are wondering whether to be self-employed or setup as a limited company.

There are benefits and drawbacks to operating as a limited company:

Benefits

  • Limited Liability – your personal assets are protected by trading through a limited company (assuming you haven’t signed any personal guarantees). You will have duties as a director, but as long as you have adhered to these duties then if the business fails you should not be held personally liable.
  • Lower Tax – a typical structure for a small limited company will be for it’s owner(s) / director(s) to take a low salary with the balance of drawings being made through dividends.  Because corporation tax rates are currently at 20% (for the lower level of profits) this can provide a lower level of taxation than through self-employment, largely due to the savings in national insurance. We can advise what the savings are likely to be in your particular circumstance.
  • Reputation – rightly or wrongly there is often a perception that a Limited company is more established as a business.
  • Investment – if you will be looking to raise investment in your business then being a Limited company is defintely the route for you as you will be able to allott or sell shares to an outside investor for an interest in your business.

Drawbacks

  • Cost – whilst it is relatively straightforward to set up a limited company the administration and accounting costs are higher than that of being self-employed. However the savings on taxation usually outweigh the additional cost.
  • Flexibility – when you are a sole trader you are able to apportion a mix of personal and business costs on some of your expenses. For example you may charge a percentage of your phone bill to the business and may have a cost of using your home as an office that you attribute to the business. When you are a limited company there is not as much flexibility, generally a cost must be incurred wholly and exclusively for business purposes.
  • Interest – one of the benefits of being a sole trader is that you have the ability of earning much higher interest on your businesses cash balances. These days interest rates on company savings accounts are very low, whereas as an individual you can use any savings account available, including a tax free ISA.

Other information

If you want to check out if your Limited Company name is available, you can check it out on Companies Made Simple below (our preferred partner for Company Formations)

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If would like further advice on this area please do get in touch. We can set up a Limited company for you, usually within 48 hours.